A First Step towards
Rebalancing the System
By
Morris Pearl, Adam Satchell and Aaron Regunberg
With inequality at
historic highs in America, political and economic power has become
extraordinarily concentrated in the hands of elites, who use that power to
re-write the rules of the game in ways that further their interests.
There is perhaps no
policy that better embodies this reality than the carried interest tax
loophole.
The carried interest
loophole allows private equity and investment managers to pay taxes on their
income at capital gains rates rather than as normal income -- meaning they get
away with paying a fraction of what every other working American pays.
A low capital gains tax
was originally justified because of the risk involved in investing your own
money. But today, investment managers earn their (extremely large) fees from
investing other people's money rather than their own.
Labeling those fees as
capital gains is a tremendous stretch -- and so, as a result, we have a
loophole where billionaires get a lower tax rate than kindergarten teachers and
truck drivers.
There is bipartisan support to resolve this disparity. Indeed, both Hillary Clinton and Donald Trump committed to closing the loophole.
Unfortunately, Trump's pre-election rhetoric of "getting tough on Wall Street" seems to have been just that. With an administration stacked to the gills with Wall Street insiders, there is little sign of a push to solve this problem at the federal level.
That's no surprise.
Every time reform is attempted, lobbyists flood the DC offices of elected
officials and wealthy donors pick up the phone to make sure loopholes like
carried interest stay open. But while the Washington agenda may still be bought
and sold, officials in Rhode Island have the opportunity to step in and make a
change ourselves.
State legislatures can
pick up where Congress is faltering, by "repatriating" the lost
revenue in the federal loophole. Rhode Island's private equity and hedge funds
earn $402 million per year in under-taxed carried interest. A state bill to
recapture fair-share tax rates would provide an estimated $40 million per year
that could go straight into funding Rhode Island's most critical needs, like
school infrastructure, higher education, and more.
That's why we introduced
H 5563/S 0259, which would establish a 19 percent fairness fee for investment
management services in order to tax the carried interest income of hedge fund
and private equity investors as traditional earned income, and which would only
take effect if similar legislation also passes in New York, Connecticut,
Massachusetts, and New Jersey -- states that have the highest concentration of
investment managers.
This is fundamentally
about fairness. Carried interest is a fee for providing services, just as
doctors earn income for treating patients, or teachers earn a paycheck for
teaching our young people. There is no reason why an investment manager's fee
for doing their job should be taxed at a rate so much lower than every other
regular wage and salary worker.
It is time to reclaim
the meaning of fair in our tax code. It is time to close the egregious carried
interest tax loophole.
Morris Pearl is the Chair of the Patriotic
Millionaires and a former managing director at BlackRock. Adam Satchell is a
Rhode Island State Senator representing District 9. Aaron Regunberg is a Rhode
Island State Representative representing District 4.